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Saturday, November 30, 2002

FULL DISCLOSURE: I've made a couple of modifications to my post on pesticides, by adding the term "expected utility" to the dicussion of choice under uncertainty and by making a couple of spelling corrections. The point of what I wrote has not changed, though.

Thursday, November 28, 2002

Sorry to be so quiet this week. I've been busy reading economic papers, to make sure I catch up on my microeconomics course, though I took a half-hour out last night to tweak the sidebar links and to add a comments feature. Postting will unfortunately be light over the next couple of weeks as I have a test on December 11. Cheers.

Sunday, November 24, 2002

Nick thought I was taking a shot at him with my brief post on risk. I wasn't, nor was I talking about a specfic policy action. All I was saying is that people react to different risks with like probabilities differently, irrespective of whether something can be done about it or not.

Standard expected utility theory, formulated by John von Newmann and Oskar Morganstern in the 1940s, assumes that people are consistent in their preferences, in that they are expected-utility maximizers. A risk-averse person (one who fears a loss more than they value a gain) should therefore be consistent in their desire to avoid risks of a similar magnitude. It did not take long for this hypothesis to break down, though. Nobel laureate Maurice Allais in 1954 published his famous paradox. Allais conducted a series of experiments that showed that risk-averse individuals often choose a gain in a second decision round that is inconsistent from the one the made in the first round, even though the expected utilites or outcomes are the same. Daniel Ellsberg in 1961 showed that decision-makers give events with 'known' probabilities a higher weight in their outcome evaluation, even though the 'unknown' outcome has a higher expected value. Part of this year's Nobel Prize recognises Daniel Kahneman for his work (together with the late Amos Tversky) in providing a more relistic framework for how people approach uncertain situations.

Why does von Neumann-Morganstern expected utility theory survive, though? Mainly because of its sheer predictive power--you can model with it pretty decently, whereas most paradoxes are based on small-scale experiments that are difficult to scale up to the level of a functioning market, let alone a macroeconomy. It's not perfect; read D-Squared if you want a description of why most current models don't actually model the future, but really flatten it down into the present--your dynamically modelling what you think of the future rather then the future itself. For most economic applications, though, expected utility works pretty well. Consistency is also a sounder basis for policy "Non-rational" models help explain how people behave, and can give and insight as to how people respond to polices, allowing those polices to be tailored more appropriately to their desired outcomes, especially if you're trying to influence behaviour. Models of inconsistency, though, are not a good reference for how policymakers should make decisons--if anything, they are simply a reminder that decisions should be made rationally.

The example I used about pesticide use was grabbed out of the air, but not entirely so; I had in mind the campaign of the World Wide Fund for Nature, among others, to ban DDT. That DDT has had a harrmful environment impact on animals, especially birds of prey, in undisputed, and in large part has to do with the indiscriminate use of the organochoride in open areas. It's impact on humans, however, is questonable at best, though the WWF cites this as a major part of their call for a total ban. Several scientists maintained that DDT, while it should be banned in agriculture, should be retained for use in malaria control, where no other control method is nearly as effective. In 1999 a group of doctors and scientists successfully petitioned diplomats towards this.

The WWF was prepared to put up with uncertainty about an alternative means of malaria control, but not the uncertainty of continued DDT use. According to Cliff Curtis, director of WWF's global toxics initiative, "[the WWF] have called for a phase-out of the use of DDT by 2007 . . . and that remains our position. The cause of finding alternatives to DDT, and getting committed funding for that work, will be far better served by establishing a deadline for a phase-out." The malaria activitsts, on the other hand, thought that public health benefits could, on balance, be best served by the certain, continued use of DDT until the uncertain arrival of a proven, effective alternative.

Juan Gato makes this point:

[T]he story of DDT illustrates the trade-offs that are inherent in most environmental policy questions. Pesticide use (or overuse) can cause environmental harms, such as the decline of bird species due to DDT. The prohibition of pesticide use can mean the loss of habitat or, in the case of DDT, a resurgence of malaria. It is not clear to me why good environmentalists must be more concerned about the former than the latter.

The simple act of banning pesticides, like all other policy decisions, is not cost-free, which is the original point of Taylor and VanDoren's article. The 1-in-1 million example of risk that I used is actually quite low. Motorcyclists risk a far higher probability of death or serious injury, yet many are prepared to live with the risk as they enjoy the freedom of the open road. People live in volatile flood plains, in earthquake zones, at the foot of volcanos, in tornado areas or close to fire-prone forests, fully aware of the risks they are facing. (To be fair, having good insurance helps; if you know you're going to be well compensated, there's little incentive to live carefully. Models of this are part of the reason why Joseph Stiglitz shared the Nobel Prize last year. That, however, is another post.) Policymakers, and those who would shape policy, would do a lot better to keep risk, and people's heuristics regarding them, in mind.

Friday, November 22, 2002

In keeping with this week's theme of the environment, Brian Micklethwait sheds some light on a somewhat pernicuious tragedy of the commons:

It's the sneakiness of it that gets me. The chewing gum droppers know that in the grand scheme of things their petty little misdemeanour doesn't rate very high on the wickedness scale. And it is exactly this that they exploit. In a world of terrorist outrages, ever rising crime of the more usual sort . . . who has time to moan about chewing gum?

I agree with him wholeheartedly, but I have yet to figure out how this form of pollution could be dealt with, short of banning it like Singapore does.

Wednesday, November 20, 2002

From Taking Environmentalists Seriously, an article by Jerry Taylor and Peter VanDoren:

. . . the decision-framework employed by environmentalists would look absurd in any other policy context if it were stripped of its emotional baggage. To focus only on the benefits of action rather than on both the costs and benefits of action, as well as inaction, is logically indefensible whether we're talking about our war against terrorism or our war against pollution.

Part of the reason why people are inconsistent in their positions is that they use different heuristics when faced with different problems, even if they are of a similar nature or the stakes are comparable. This is especially true when it comes to policy, when people are perfectly willing to tolerate some risks (say, a 1-in-1 million chance of dying in a terrorist attack) and not others (a 1-in-1-mllion chance of getting cancer from a pesticide-sprayed apple, say.) The outcomes are comparable (death in both cases) but one is treated as being worse, or more serious, than the other. Policymaking would be a lot sounder if more realistic attitudes towards costs, benefits and risks were taken into account.

Note: These two guys are from the Cato Institute, a libertarian think that that is officially against war in Iraq. (Link via Mindles H. Dreck.)

Tuesday, November 19, 2002

This morning I decided to comment via email on Nicholas's post about drilling in the Nariva Swamp. As has become a frequent occurrence over the past few weeks, he responded, and a great debate begins.

Let me say that the evidence Nick provides at best weakly supports his case against seismic surveying. Firstly, he talks about the effect of seismic testing in the Arctic National Wildlife Refuge. This testing took place in 1984-85, with the "heavy, monster trucks" that he writes about. What he fails to realise is that companies, even oil companies, do not operate in a vacuum. Does he not think that the technology to test would have improved in the past 17 years, not least due to pressue from environmentalists? Indeed, this is brought out in the second study he mentions, from the Alberta Centre for Boreal Studies. The ACBS talks about low-impact seismic methods, which uses vehicles with low ground pressure. They also mention "enviro-drills . . . [t]hese are shot-hole drills mounted on specially-designed all-terrain vehicles that require only 2.5 m corridors for access." Surely there are even other ways to test that leave even less on an environmental footprint.

I am not saying that the swamp should be exploited--personally, I would rather it not be. I even think that Talisman Energy, the Canadian company applying for a permit to test, is an unscrupulous company, and they probably should not be given the permit to test. (I told Nick this in the email.) His position, though, sounds like exploitation should not even be contenanced--that the idea of doing so should not be entertained. This sounds less than reasoned argument than the faith of anti-development--certain areas are no-go, and that any proposal to do so is either too ludicrous or too blasphemous to be considered. This won't make for deliberation--it will mean a shouting match, and a poor one at that.

UPDATE: Nick responds to the above here. His argument sounds as if I am supporting Talisman, and I am not--I do not think that the company has been very socially conscious (though I notice that Nick is not protesting its environmental record, which would probably be a fairer yardstick, given what we're debating.)

He is right, though, that I take issue with any area being declared "off-limits". I am saying is that exploration (for now, that's all that's being contemplated) should not be viscerally ruled out. When I wrote about a "faith" this is what I meant--the swamp is either a preserve or it's not, and no way to balance a preserve with development (like drilling sideways into the oil underneath it, should any exist, rather than having platforms on top of it) should be considered. The Nariva swamp was set up as a preserve years ago, when there was either insufficient knowledge of, or no cost-effective means of exploiting, the resources beneath it. Now that technology has improved, the swamp must remain sacrosant. Nick's even used the "slippery slope" argument -- a pessimistic fear of the unknown--to justify his position. Must any changes necessarily lead to a bad, or even the worst possible, outcome?

The swamp is a state preserve as well; the government, if it so desired, could make the use of less invasive exploration techniques a condition of any permit. Also, the Nariva preserve does not exist in a vacuum--if the swamp was not already a preserve, environmentalists would probably be campaigning to make it so.

He is right that I agree with him, but with one proviso: I am against development in the swamp, but I am open to arguements for why it should be allowed, and I am willing to reconsider. Maybe there is no way that the Nariva would be safely exploited, and all of this could be folly. We won't know, however, unless we look, which, to my mind, is a superior position than banning looking at all.

Monday, November 11, 2002

In my pre-wannabe economist days, back when I worked in television, I had a small role to play in the live broadcast of a "Celebration of Vision"-- the party commemorating BWIA's first profit in 50 years of operations. Now, profits are what companies are supposed to make; not making one in half a century makes the first one sweet, I imagine, but it does not make the fact any less true, and it does not need to be celebrated. More than a few CEOs have infamously tried their hand at turning the BWIA around, though, and Aleong and Chairman Lawrence Duprey seemed to have created, finally, the successful strategy.

I thought then, though, that the Country Club live broadcast was a mistake; if the airline was listed on a more transparent and demanding stockmarket, it would have been punished for the hubris of that decision. No investor wants their first profit spent on a big party, of all things, and a big celebration shows that management was taking a greater interest in itself and in flashy headlines than in its own shareholders. An airline, especially, is vulnerable when the next shock or cyclical downturn hits, and having a good cash pile helps tide things over. The amounts spent on such frills may have been small, but it not the figures--it's the impression they create.

Now BWIA has had its annus horriblis, and all are calling for drastic action.

Everyone was caught out by the terrorist attacks of September 11, 2001. Given that shocks and economic cycles play such a huge role in any interational airlines risk profile and bottom line, one would have though that the carrier would have been able to deal with it better. No such luck. The managment team that should have been punished by the markets a couple of years ago for profit-gloating should now be thrown out by investor demand for malfeasance. The right authority has yet to be offended, though, and management, like the airline, flies on.

Martin Daly and Rickey Singh, among others, are calling for a regional air carrier to be set up as an "essential service". An essential service to whom? Conrad Aleong, BWIA's CEO, wrote an update over a year ago saying that the region's people need and affordable means of air travel. While I agree on the need for an affordable means of travel; what I don't see is the need for this affordable means.

The current situation in Caribbean air travel did not just happen; a lot of it was the creation of deliberate policy. BWIA's unions are wondering about the carrier's accounts, and are concerned about "shady dealings" at its subsidiary, Tobago Express. Would this matter so much if the route to Tobago was not a licensed monopoly? In a "community" whose citizens have to use passports to travel from island to island, when most tourists can travel on a driver's licence, the fact that intra-regional transport is expensive is no coincidence.

In Trinidad and Tobago, Barbados and Jamaica, a private means of public transport exists--maxi-taxis or minibuses, dependings on where you live. True, they have to be licenced, and the owners do have to belong to the association. But organisation pretty much ends there. Anyone can enter the business, and anyone can leave. Competition keeps fares down, yet most drivers remain in business--in trinidad, for example, Priority Bus Route Drivers pay a premium for their permits, but their fares are the same as Eastern Main Road or Churchill-Roosevelt Highway drivers, whose routes all terminate in the same place.

It may seem odd to compare "jitneys" to an airline, but ins some ways the same dynamics apply. Why was nothing done, for example, about BWIA's aggressive predatory pricing a few years ago to successfully force Air Jamaica out of offering a route to Trinidad? Why did the Trinidad government allow BWIA an allocation of half of the departure gates at the new Piarco airport terminal? These were not sound positions, and allowed Bwee to carry on as if it were in a favoired position. BWIA's no the only one. The Trinidad Air Line Pilots Assocation has put out advertisments over the past couple of years saying that charter airlines were "dumping" cheap services on the region, and that this was a threat to regional airlines. Where's the right to affordable travel then?

The region has seen the failure of many airlines (EC Xpress, Air Caribbean and Caribbean Star, to name but three in the past four years) and the governments of some smaller tourism-dependent islands feel that they are hostage to the whims of external carriers. Time and again, though, the airlines, unions and governments have organised to keep regional transport expensive. If flights were cheap, safe, and reliable, does it really matter what nationality the airline is? Sentiments like this are peans for perfect safety, for zero risk. The efforts aimed at achieving the security of air travel have failed for over 40 years, and there is no reason to think that the efforts of interested parties will bring this about now.

Perhaps a cheap, point-to-point model should be tried--allow anyone with the capital to set up direct routes between any island, according to demand. Forget service--the no-frills business model of American carriers Southwest and JetBlue, or the European carriers Ryanair and easyJet should be tried. Why only aircraft? Why has there been a decline in ferry travel? The French company L'Express des Iles does a good business in the eastern Caribbean already; why aren't more companies doing this?

Daly and Singh are raising the essential service mantra as if it were the only solution. It's not. Solutions don't always have to be handed down--withness the jitney pehomenon. What is clear is that it involves a measure of risk. Risk is what the BWIA managment were unprepared for, and the avoidance of risk are what the calls for an essential service are all about. Until such attutudes change, such a "crisis" as exists today is bound to repeat itself.

Sunday, November 10, 2002

Nicholas (my debating partner) has posted about the pettiness of right-wing bloggers, who he thinks resort to name calling and belittlement rather than fact and wit. (Wit?) I agree with a lot of what he says. I, personally, don't like fiskings all that much, as much as I may dislike the opinions of, say, Robert Fisk and George Monbiot. It is hard to do well--shouting (sic) that something is shit is inelegant, to put it mildly--and for the most part it's preaching to the converted. It's the converse of those doctored photos of George W. Bush making their way around by email. No points for orginality there.

That said, he can't bring himself to not read the warblogs--they're a fascination he "hasn't quite figured out yet". I, personally, read Instapundit several times a day, and I agree with much of what he writes; warblogs have gotten me even to reconsider my position on public ownership of guns. (I now say that I support a right to self-defence--which no longer exists in the UK, where I live--with arms if necessary; whether that implies a right to bear arms I have yet to figure out.) I read blogs less for that reason, though, than for what they link to. Critical or not, they link to a lot of stuff, and they can serve as useful news filters especially if they serve as infomration conduits, as Glenn Reynolds's blog does. I don't look for long expositions or reasoned arguments in the Blogosphere, except from essay-type bloggers like Megan McArdle (a personal favourite--she blogs a lot about economics) and Steven Den Beste (whose arguments I often vehemently disagree with, especially in tone, but he makes an argument). Most bloggers don't do this sort of thing. The links, though, allow you to form your own opinion. Read a fisking, and see the bias; follow the link the Fisk and make up your own mind.

Blogs are pretty much an echo chamber in my opinion; they're read mostly by people holding similar opinions, and a lot of linking to fellow bloggers consists of backslapping. Reading them also probably allows people to overestimate their effect. I think the United Nations statistic that 2 billion people have never made a phone call to be spurious at best, and that the notion that the "digital divide" is a problem to be exagerrated concern, but one has to remember that a lot of people are not online, and that a lot of those who are aren't reading warblogs. I am quite aware, for example, that no more than 10 people, if so much, will ever read this. Sometimes one wishes that this would enforce a little humility on bloggers, like the fairy-cake torture device in the Hitchiker's Guide to the Galaxy. I hope the readers of blogs realise the same thing.

Sorry I've been on a bit of hiatus. I had a nontrivial test in microeconomics this week past, and I lost touch with much of the world (and many hours of sleep) studying for it. I can't tell you how much I'll be posting, but i'm aiming for twice a week.